Cuts to welfare payments will hit the local economies of northern towns and cities as much as five times as hard as the Conservative heartland southern counties, according to research commissioned by the Financial Times into the impact of austerity.

The government's radical reform programme, aimed at reducing one of the largest fiscal deficits among OECD nations by moving people off the benefit rolls and into work, is taking £19bn a year out of working-age social security between now and 2015.

The Tories say the welfare cuts will spur the private sector to greater dynamism on the back of an expanded labour force. Three years after the policy was unveiled, the CBI employers' organisation continues to endorse it while cautioning of the risks for hard-pressed families.

But as the government considers further deep welfare cuts in the June spending round, the FT's research underlines the potential risks to economic regeneration and private sector business prospects in poorer areas where the local population faces the loss of a large slice of purchasing power.

The findings of the FT's investigation – the first to examine the local economic and business consequences of the reforms – suggest any impact will be most acute in areas outside Tory strongholds.

So great is reliance on social security in some areas that the changes, when fully implemented, will in effect eliminate 6.5 years of real household disposable income growth in Blackpool, the hardest-hit town, which on average will lose £914 a year for every working age adult. In prosperous inner London, Surrey and Buckinghamshire just a few months' worth of income growth will be lost.

The research by Christina Beatty and Steve Fothergill of Sheffield Hallam University, part-funded by the Pulitzer Center on Crisis Reporting, measured the impact of the welfare cuts from 2010 to 2014-15 on individual local authorities. Their calculations were based on the local caseload of claimants and official impact assessments of the likely losers.

The traditional industrial areas of England, Scotland and Wales, such as the Welsh Valleys, will be hard hit, particularly by tighter eligibility requirements for disability benefits. The population of Merthyr Tydfil will lose £722 a year, the same as Middlesbrough.

Inner-London areas with high rental prices are also hard hit by the restrictions on housing benefit. But the large cash cuts to those claiming welfare payments will have little effect on the London economy because social security is only a small proportion of total gross household disposable income. The welfare cuts represent 4.65 per cent of household incomes in Blackpool, but only 0.86 per cent in Surrey.

Prof Fothergill said: "A key effect of the welfare reforms will be to widen the gaps in prosperity between the best and worst local economies across Britain. Our figures also show that the Coalition government is presiding over national welfare reforms that will impact principally on individuals and communities outside its own political heartlands."

Mike Cherry, national policy chairman for the Federation of Small Businesses, said small independent shops already faced tough competition from supermarkets and out of town centres and had gone through a hard time during the recession. "Taking more money out of already struggling local economies may well exacerbate the problem," he added.

Ben Page, chief executive of Ipsos Mori, the polling company, said the heavier impact in the north would also make it harder for the Conservatives to gain the broader-based support it would need to win outright at the next general election. "Politically it just makes the Conservatives' challenge even harder," he said.

The government said: "Raising the personal allowance to £10,000 we will have lifted 2.7m people out of income tax since 2010. Our welfare reforms ... will help people back into work – which will benefit the economy more than simply abandoning them to claim benefits year after year."— By Chris Giles and Sarah NevilleApril 11, 2013

Thermal underwear and chocolate Easter eggs jostle for space outside his store; inside, a young man bargains to buy a £3 "popper" – a liquid legal high – for £2 and reacts as if he has won the lottery when Mr Sodawala agrees.

Blackpool's economy has long reflected the limited financial horizons of a benefit-dependent population: discount stores, charity shops and takeaways make up its retail spine. For such businesses, life is about to get even tougher.

Research commissioned by the Financial Times shows that benefit cuts, beginning this month and continuing until 2015, will mean Blackpool loses more than £900 a year for each working-age resident, more than anywhere else in the country.

"Even now, it's quiet. If you're cutting people's money, it's going to get even more quiet," says Mr Sodawala. "The recession, the weather, the cuts . . . it just keeps on piling up."

These are blows Blackpool is ill-placed to sustain. Once its rococo Winter Gardens conference centre played host to the annual gatherings of major political parties: from its podium Margaret Thatcher in her pomp prescribed tough economic medicine to recession-hit 1980s Britain.

The political elite deserted in the past decade in search of better rail links and smarter restaurants. The town is still struggling to find a 21st-century identity, hampered by a low-skilled labour force and seasonal economy. Almost one in four working age adults claims unemployment or incapacity benefit, double the national average; an equal number work in a public sector that is inexorably shrinking.

Yet in Blackpool, Fylde and Wyre Credit Union, which offers low-interest loans to people on benefits, Mike Barry, operations director, says most claimants are "oblivious" to the impact welfare reforms will have.

As household cash contracts, he predicts: "Local businesses will have less footfall [and] less income."

Private landlords, who accommodate one in four Blackpool residents, double the national average, are "absolutely terrified" at the threat to their cash flow from housing benefit cutbacks, says Mr Barry.

His business model is under threat. "If we start losing money because people simply haven't got it to give back to us then it could be that we [have] to re-evaluate the level to which we can be involved in that sector of the economy," he says. That could leave Blackpool's most vulnerable seeking payday lenders and loan sharks, he says.

The government hopes that, as more people are forced off welfare into the labour market, increased economic dynamism will offset lost benefits. Alan Cavill, the council's assistant chief executive, says such optimism "doesn't feel right".

Even now, it's quiet. If you're cutting people's money, it's going to get even more quiet

Low wages and lack of mobility mean people often cannot travel far to seek work and jobs are hard to come by in Blackpool. When the council recently hosted a recruitment day for a call-centre, a note was taken of how people got there: 90 per cent had walked.

In a fried chicken shop in the shadow of the town's famous tower, an assistant talks sardonically of "payday" when benefit cheques have been cashed and a queue starts to form five minutes before the doors open. Will claimants still keep the cash registers ringing when their income diminishes? As an unseasonably icy wind blows outside, he can only wait and wonder. — By Sarah Neville, Public Policy editorApril 10, 2013

The places that will be affected most by the cuts in welfare are the places probably least well equipped to support private sector jobs growth

Business questions long-term gain for customer pain

Few companies have better insight into the impact of austerity on consumers than Asda, the supermarket chain whose heartland is the north of England.

Asda is seeing consumer behaviour patterns change

As customers have become more frugal, Asda has reintroduced £5 notes into its cash machines to reflect a trend towards smaller withdrawals. Store managers report more shoppers using calculators to add up their bill as they go around.

Conditions are about to get tougher still for many Asda customers as a raft of welfare changes introduced this month reduce incomes for millions of households. "Where we know that there are going to be high levels of unemployment, or high levels of social housing, and people who receive benefits, there is clearly going to be a knock-on effect," says Paul Kelly, external affairs director of Asda.

Three years after many businesspeople applauded the government when it came to office pledging to reduce the structural deficit with swingeing cuts many are asking whether the potential long-term gain is worth their customers' pain. This question is at the heart of the Financial Times investigation into the effects of welfare cuts on local economies.

About £19bn a year will be taken out of working-age social security between now and 2015, according to research by Sheffield Hallam University for the Financial Times, much of it from poorer parts of the north of England, Wales and Scotland.

The coalition is gambling that long-term gains from its effort to improve work incentives will ultimately outweigh the pain of welfare cuts, which will suck further demand from the weakest economic areas.

George Osborne

Chancellor

George Osborne, the chancellor, asserts that employment will be boosted by "making work pay", so that "when people are in work, they can keep more of what they earn".

Experts agree that, if welfare reforms are shaped effectively, they should help create jobs. But those effects are hard to measure and some question whether the changes are properly designed to achieve that aim.

"In the short term, I have concerns that the places that will be affected most by cuts in welfare are the places probably least well equipped to support private sector jobs growth," said Alexandra Jones, chief executive of the Centre for Cities think-tank.

It comes as local councils wrestle with cuts to their budgets and the economic development system for English regions is in flux, after the creation of local enterprise partnerships that so far have little funding or powers.

Poor areas also tend to have the weakest skills profiles, posing a barrier to getting people into work even if jobs are available. Schools in those areas are less likely to equip students with maths and English GCSEs, most important for employment, according to Centre for Cities research.

Towns most at risk from cuts often have deprived high streets

Welfare cuts may hasten the retreat of mainstream retailers from struggling town centres. Those most at risk already have some of the most deprived high streets, according to the Local Data Company, a retail information provider.

"You could expect them to get worse," said Matthew Hopkinson, director. Quality retailers would continue to retrench, particularly as shop leases came up for renewal.

Nicholas Crafts, professor of economic history at the University of Warwick, said jobs could be created if incentives to work improved relative to benefits, as happened in the 1980s.

Incentives had recently gone in the opposite direction, he said, because the ratio of benefits to wages had risen sharply since 2009 as earnings were squeezed while benefits rose in line with inflation. The new benefit curbs will start to reverse that.

Henry Overman, professor of economic geography at the London School of Economics, said he feared the negative demand effect was likely to outweigh any positive supply effect.

Even if work does pay for the majority of people at the moment, people do not understand or believe that, so it has to go hand-in-hand with things which make people more responsive to the incentives

"Even if work does pay for the majority of people at the moment, people do not understand or believe that, so it has to go hand-in-hand with things which make people more responsive to the incentives," said Matthew Oakley, of the Policy Exchange think-tank.

A Centre for Cities study of how local areas have fared since 1901 found the strongest performers were those that had above-average skill levels. The lesson, Ms Jones said, was the crucial importance of continuing to invest in people — By Brian Groom and Andrea FelstedApril 10, 2013

Shops have closed down but as soon as one closes another opens in its place. I would say [austerity] has had very little impact

Austerity has little impact on Guildford

Lyn Adams had expected a typically restrained start to the year following a "cracking" Christmas at her upmarket whisky boutique off Guildford's cobbled High Street.

Business has been booming at Lyn Adams' whisky shop in Guildford

But brisk sales ahead of Burns Night were soon followed by Valentine's day, which brought a surge in townswomen buying £50 bottles for their husbands and boyfriends. "I was battling to keep the shelves filled up," says the Whisky Shop manager.

In an uncertain economic climate, this prosperous Surrey town 27 miles southwest of London shows that the impact of government welfare cuts is not shared equally across the nation.

Research commissioned by the Financial Times into the impact of welfare cuts on local economies found the borough among the 10 least affected local authorities, with £263 lost per working age adult annually by 2015, compared with £475 nationally and £561 in the northwest.

Guildford has a long history as an important economic staging post, first as a stop on the Pilgrims' Way, a historic pilgrimage route from Winchester to Canterbury, then as a key junction for canal and rail transport in the 19th century.

I started from nothing and I've been growing month on month. People here seem completely unaffected by the cuts

But its reputation for affluence was sealed in the 20th century, when fast rail links to London established it as a popular dormitory town for bankers, lawyers, accountants and other professional workers. Today, a little more than half the working population commutes into the capital.

Beyond Guildford town, the borough is replete with villages of picture postcard perfection. Surrey boasts higher-than-average wealth: gross disposable household income per head was £21,501 in 2010 versus £15,727 for the UK, while the county was the second richest area in the UK after Inner London West by income.

Austerity measures have had little impact in Guildford

Guilford's local economy is also bolstered by the presence of large employers such as BAE Systems Detica, a cyber security specialist, and Ericsson, the telecoms group.

Local expertise in science, IT and pharmaceutical industries is strong, with the University of Surrey based in the town as well as spinout companies such as Surrey Satellite Technologies. The robust labour market is reflected in a jobless claimant count of 1.6 per cent, compared with a UK average of 3.9 per cent.

On a High Street buzzing with activity on a chilly day, Guildford resident Barbara Jones, 69, says retailers are "as busy as ever". "Shops have closed down but as soon as one closes another opens in its place. I would say [austerity] has had very little impact," she said.

Waitrose, a favourite of the middle classes, last year won planning permission for a large supermarket in the town.

Others agreed that the area seemed immune from the problems of the wider British economy. At Tom Fox, a bespoke suit brand up the road from the Whisky Shop, tailor-made suits cost an average of £700 – the kind of discretionary purchase that might have been expected to fall away during difficult economic times.

Philip Denning, founder and director of Tom Fox

But Philip Denning, founder and director, says his trade has expanded continuously since he opened two years ago. "I started from nothing and I've been growing month-on-month. People here seem completely unaffected by the cuts," he says.

For those on good wages, he says, low interest rates and low inflation may even have boosted spending. "Many people here have never had it so good."

The housing market is buoyant, with average values at £421,000 compared with £234,000 in England, according to data from Zoopla, the property group. In a ranking of counties by total property value, Surrey comes third after London and Essex.

But Guildford has its share of low-income groups and relatively high levels of public sector employment compared with the rest of Surrey. Chris Mansfield, head of economic development at Guildford borough council, warns that since many of the public spending cuts are yet to come into force, the local impact could yet worsen. "There will be consequences to some degree," he says.

For now, Ms Adams is convinced she is in the right place. She points out her most expensive whiskies, a four-bottle limited edition set from maker Sirius that carries a price tag of £6,500. "We've sold three sets in the last year." — By James Pickford in GuildfordApril 11, 2013

The chain retailers we know have been drawing down. [They] are not going to want to have shops in places where there is not a lot of money

Emptying high streets braced for cuts

High streets and store chains across the UK are bracing themselves for the impact of fresh welfare cuts, with some retailers adapting their product mix and marketing strategies in response and others retreating from the worst-hit areas.

Many mainstream retailers have already trimmed their presence in poorer parts of Britain, and analysts say the raft of welfare reforms introduced this month could accelerate the trend.

"The chain retailers we know have been drawing down. [They] are not going to want to have shops in places where there is not a lot of money," says Matthew Hopkinson, director of the Local Data Company, a retail information provider.

Retail chains with more than six stores closed a net 20 stores a day across the UK last year – openings less closures – and a net 28 a day between December and February, according to the Local Data Company and PwC, the professional services firm.

More than half of all retailers in Dagenham's
high street are classed as value rather than premium retailers, as are 38 per cent in Port Talbot and 33 per cent in Blackburn.

Poundland, the single-price discount retailer, is among those that has prospered in leaner times. It opened 60 stores in the UK and Ireland last year and plans another 60 this financial year.

Jim McCarthy, Poundland chief executive, says he expects the latest welfare cuts to reinforce the shift towards "value" retailing. As times get tougher, he says consumers spend more on staples, such as food and groceries, and less on discretionary items.

Consequently, he says Poundland has expanded its ranges of food, groceries and essential items priced at £1 each, and has stepped up special offers.

Wm Morrison, the supermarket chain which has a high concentration of stores in the north, says it is monitoring the impact of benefit cuts and could make changes to its product mix if sales trends change.

Mike Coupe, commercial director of J Sainsbury, says that during the downturn, the volume of food purchased has declined for the first time since the second world war. "The reality, I suspect, is that more austerity will continue that trend downwards." — By Andrea Felsted, Senior Retail CorrespondentApril 11, 2013

I have youngsters applying to work here who say they will only do 16 hours because otherwise they will lose their benefits

Reforms dig into ex-pit town's benefits

Rob Mason started his career as a miner at the Deep Navigation Colliery near Merthyr Tydfil. Two decades after its closure, the 68 year-old still works most days stacking shelves at a local convenience store.

Rob Mason stacks shelves in his local store

"I don't drink since the smoking ban," says Mr Mason, dressed in baseball cap and reflective orange donkey jacket. "But I still find I'm short at the end of the week."

The government's welfare reforms could make life even tougher for Mr Mason and others in Merthyr Tydfil, where one in four of the population receives some form of benefit.

The town will lose £263 per working-age adult from changes to incapacity benefit – more than anywhere else in the country – according to research commissioned by the FT.

Local councillors say they fear the new regime will push families deeper into poverty and exacerbate health problems – ultimately adding to welfare costs rather than making savings.

"Keir Hardie would be turning in his grave" says Brendan Toomey, a part time fireman and Merthyr's council leader, referring to the founder of the modern Labour party, whose striking bust greets visitors to the civic offices close to the River Taff.

Keir Hardie

Founder of the modernLabour party

But the former MP for Merthyr, first elected in 1900, would probably be equally shocked at the steep decline of this once vibrant mining and steel-making centre. Today, it has the second highest number of disability living allowance claimants in the UK, topped only by nearby Blaenau Gwent.

"There were no people on the sick before the mines closed," says Ian Benbow, head of the council's adult social regeneration unit, making clear where he lays the blame.

Victoria Winckler, director of the Bevan Foundation a left-leaning economic think tank, says successive UK governments encouraged people to migrate on to sickness benefit as a way of massaging down the more politically sensitive unemployment figures.

That trend could now be reversed as ministers toughen eligibility assessments for sickness and disability benefits. Not everyone in Merthyr thinks this is a bad thing.

Surinder Khehra, owner of the Castle Hotel, supports government efforts to "make work pay".

"I have youngsters applying to work here who say they will only do 16 hours because otherwise they lose their benefits," he says. "I think the more they cut the welfare bill the more people will go back to work."

Tim Owen, founder of a chain of community pharmacies in the Valleys and a rumbling bass in the local male voice choir, believes Merthyr suffers from a "sponge ethic", with too many people dependent on welfare.

For local retailers, the knock-on effect of benefit cuts could be severe in an already rundown town. The convenience store where Mr Mason works is located in one of Merthyr's poorest housing estates. Yet, its owner, Udam Singh, believes he may be one of the few local beneficiaries of welfare reforms.

"I think people will have to live on more of a day-to-day basis," he says. "They won't have the money to do the big shop at the supermarket. That could be good for us."— By John Murray Brown in Merthyr TydfilApril 11, 2013

Labour tested to destruction the idea that simply through larger and larger increases in the welfare bill you could handle the north-south divide

Cameron stands by welfare reform

David Cameron has rejected criticism of the government's welfare reforms after a Financial Times analysis showed that cuts are hitting poor people in the north far more than those in southern Conservative heartlands.

The government is hitting hardest the places where jobs are fewest, at time when their policies are failing to deliver the growth they promised and when unemployment is forecast to rise

A raft of benefit changes, several of them introduced this month, will take £19bn a year out of working-age social security between now and 2015, with some areas of the north losing five times more than wealthier parts of the south.

Responding to the FT evidence on Thursday, the prime minister insisted the coalition was right to tackle welfare dependency and denied the reforms would deepen regional economic divisions.

"Labour tested to destruction the idea that simply through larger and larger increases in the welfare bill you could handle the north-south divide," he told Sky News.

He admitted the growing gap between the poorest and middle earners was "very important", but said: "You shouldn't be better off out of work ... than you are in work, working hard trying to do the right thing for your family."

In addition to helping tackle the budget deficit, ministers hope welfare reforms will eventually encourage more people into work and increase economic dynamism. But the FT-commissioned research by Sheffield Hallam University suggests the immediate impact will involve more pain for the poorest areas of Britain.

Stephen Timms, shadow employment minister, said: "The government is hitting hardest the places where jobs are fewest, at time when their policies are failing to deliver the growth they promised and when unemployment is forecast to rise."

Labour leader Ed Miliband's office declined to comment on the FT research, which comes as the opposition struggles to find a coherent message on welfare.

Some in the party are concerned the party risks getting stuck in the position it was in when opposing Margaret Thatcher in the 1980s of opposing cuts without its own constructive economic message.

In an article in the New Statesman on Thursday, former prime minister Tony Blair wrote: "The Labour Party is back as the party opposing 'Tory cuts', highlighting the cruel consequences of the Conservative policies on welfare and representing the disadvantaged and vulnerable."

A poll last year by YouGov for Prospect magazine showed 94 per cent of Conservative voters wanted benefits to fall, but more strikingly, so did 54 per cent of Labour voters.

The newly-introduced £26,000 benefits cap for households is supported by more than three-quarters of voters of all three main parties, according to a poll when the policy was announced by the government last year.

Labour strategists know that welfare is a risky area for the party heading into the 2015 election. One told the FT: "We want the campaign to be about the NHS. [The Tories] want it to be about welfare."

However, Mr Miliband's advisers insist there is little to be gained politically from mimicking the Conservatives' hardline stance. "We have realised the Tories are willing to push more people into poverty in their quest to look tough on welfare. Once you realise that, matching, or even trying to outgun them on the issue, would only drive you into a spiral of who can cut the most." — By Kiran Stacey, Political CorrespondentApril 11, 2013

Explore your area

Enter your postcode to see how your local economy will be affected by the changes to the benefit and welfare system.